There's no denying stocks aren't firing on all cylinders right now. Yet, a handful are creating their own tailwinds that are bigger than any headwinds that could end up blowing against them. If sustained bullishness is in the cards, shares of these companies still stand to outperform.
One to consider now is Alibaba (BABA 0.59%), the name behind China's e-commerce platforms Taobao and Tmall. It also owns a logistics business called Cainiao (which was recently spun off), a cloud computing arm, and a handful of other smaller projects.
E-commerce is its breadwinner, however, accounting for more than half of Alibaba's revenue, and roughly the same proportion of its profits. Its stock's performance is still most closely tethered to this consumer-facing operation. That's largely why BABA stock hasn't been a particularly great performer of late. Shares fell in 2021 and 2022 due to the economic impact of the COVID-19 pandemic.
Alibaba shares have continued to flounder this year as China seems unable to shake off its lingering pandemic-prompted economic weakness. Except the narrative that China's economy remains dangerously lethargic doesn't give you an accurate picture of the whole story -- particularly for Alibaba.
There are three important details setting the stage for a much stronger performance ahead.
1. Beijing is serious about stimulus
China's government finally lifted its heavy-handed pandemic lockdowns late last year, anticipating a robust economic rebound. It didn't really get it. Like so many other nations, however, China is too debt-laden and inflation-saddled to simply print more money as a means of stimulating its economy.
Left with no acceptable alternative, though, Beijing is finally starting to turn up the economic heat. In September, its federal government introduced tax cuts and lower mortgage rates for first-time and second-time homebuyers. It also cut its foreign currency reserve requirements for banks in an effort to prop up the slumping value of the yuan. The nation's government may not be stopping there either. Just a few days ago Bloomberg reported China's economic regulators are mulling yet another round of economic stimulus.
The benefit of such measures is never immediate. Indeed, it can take several months for stimulus efforts to generate measurably positive results. The market is efficient, however, when it comes to figuring out how stimulus efforts will impact corporate bottom lines. It starts pricing these changes in before the upside becomes crystal clear. Translation: Don't be surprised to see Alibaba shares perk up before it seems like they should.
2. Retail spending growth is accelerating anyway
Still, it's arguable that we are already seeing the economic benefit of China's mid-year stimulus action. Although retail consumption was growing firmly early in the year, that growth appears to be a function of relatively low comparisons. June and July's spending growth were more than a little disappointing on a year-over-year basis, hinting at spending weakness.
A funny thing has happened in the meantime, though -- August's retail sales growth jumped 4.6% year over year, accelerating from July's tepid pace of only 2.5%. That wasn't a merely mathematical victory stemming from an ultra-low comparison, either. China's retail spending in August of last year was up an incredible 5.4%, setting the bar rather high for this year's reading. Retail consumption managed to grow briskly anyway.
And this growth doesn't appear to have faltered since then. Although September's official retail spending figures aren't posted yet, China's Ministry of Commerce reports that retail sales during the nation's so-called Golden Week holiday (Sep. 29 to Oct. 5) were up 9% year over year.
This of, course, bodes well for Alibaba's Tmall and Taobao, which were already doing fine anyway. Despite China's lethargic consumer spending at the time, these platforms produced sales growth of 12% during the three-month stretch ending in June. That strong growth pace could accelerate if the country's retail spending does the same.
3. Alibaba is leaning in on e-commerce -- again
Last but not least, while all of Alibaba's business are important to the company, its artificial intelligence, cloud computing, and logistics operations have been given more than their fair share of time, attention, and resources of late. Now, it looks like its e-commerce ventures are moving back into focus.
Case in point: Alibaba executive Trudy Dai Shan's is no longer tasked with being the legal representative for Hangzhou Alimama Software Services and Taobao Software. She's now going to focus the entirety of her time on e-commerce. The company's also expanding live streaming as a means of selling more goods online. In fact, it was Trudy Dai Shan who made a point of saying during August's conference call, "We will continue to invest heavily in developing content [including video] around shopping, consumption, and daily life."
Perhaps the most exciting evolution now underway, however, is Alibaba's growing willingness to work with companies that could be considered competitors. For example, Alibaba is now running ads for specific Taobao and Tmall sale listings on social media platform WeChat, which is owned by indirect rival Tencent. In the meantime, it's working to build an e-commerce presence in Europe that works with local suppliers and brands instead of competing with them with Chinese brands and goods made in China.
If this represents the new norm for Alibaba, it could prove to be a massive growth driver.
Enough reason to buy Alibaba stock
A risk-free pick? Not at all. Not only is there no such thing, but Alibaba is in the midst of several different transitions, including a major restructuring of the company's organizational chart. These changes can be distracting, and they create additional uncertainty in the meantime. The market generally doesn't reward uncertainty.
With multiple reasons to expect growth ahead, however, the potential reward here is far greater than the risk. Alibaba shares have been held down -- arguably unfairly -- for over a year now despite the company's continued growth during this time, and nobody can give a legitimately good reason as to why this has been the case.
That's why a little more of the same kind of growth could snap the stock out of this funk. Moreover, with shares priced at less than ten times next year's expected per-share earnings, such a snap could prove explosively bullish.The tough part is just remaining patient enough to let it happen.
